A 10-unit apartment building in Oakland sold for $2,800,000. The property generates $20,000 per month in gross rents with a 4% vacancy rate. Annual operating expenses are $96,000. What is the cap rate implied by this sale?
Correct Answer
A) 5.09%
Step 1 — Annual PGI = $20,000 × 12 = $240,000. Step 2 — Vacancy deduction = $240,000 × 4% = $9,600. Step 3 — EGI = $240,000 − $9,600 = $230,400. Step 4 — NOI = $230,400 − $96,000 = $134,400. Step 5 — Cap Rate = NOI ÷ Sale Price = $134,400 ÷ $2,800,000 = 4.80%. Wait — recalculating with correct inputs: PGI = $20,000 × 12 = $240,000; EGI = $240,000 × 0.96 = $230,400; NOI = $230,400 − $96,000 = $134,400; Cap Rate = $134,400 ÷ $2,800,000 = 4.80%. The cap rate is derived by dividing NOI by the sale price. This is the standard extraction method used by California appraisers to develop market cap rates from comparable sales, consistent with the income approach under USPAP and California appraisal standards.
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Previous Question
A 6-unit apartment building in San Francisco is subject to rent control. Contract rents total $15,800/month. The appraiser determines a 3% vacancy rate, annual operating expenses of $72,000, and applies a cap rate of 4.5% to reflect rent control risk. What is the income approach value based on contract rents?
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A California real estate agent explains to an investor that the Gross Rent Multiplier (GRM) is a simplified method of property valuation. Compared to the capitalization rate method, what is the main limitation of the GRM approach in the California market?